You are currently browsing the tag archive for the ‘loss’ tag.

This trade assumes that the underlying stock will NOT move down more than 42% in the next month.  If these trades are done together (as I am illustrating) it is an INCREASED risk position.  This is a Bull Put Spread (Credit Spread)

Position:

Buy QIUUA September 5 Put for          $0.35

Sell QIUUU September 7.5 Put for      $1.20

Net                                                                    $0.85

Break even for this position is OSIR trades for $6.65 ($7.50 – $0.85) on expiration.  Today OSIR is trading for $11.75.  This would be a decline of $5.10 in the next month, or 43%.  Possible, but not likely.

Maximum Loss would be $1.65/share (+ trading costs) OSIR – $5.00 or less.

Maximum Gain would be $0.85/share (- trading costs) OSIR – $7.50 or higher. 

Assuming $.15/share trading costs the gain would be $0.70 ($0.85- $.15) for a return of 28% ($0.70/$2.50) in one month, or 336% APR.

This vertical spread trade was entered on January 17th.

SRS traded at $19.40 at the close on Friday July 17th.  Both Call options, the one bought (long) and the one sold (written), expired worthless.

We have realized our maximum loss of $3.50 (+ trading costs) or $7.80 (+ trading costs), depending on the strike prices chosen.  Our loss represents a 100% loss of the money at risk.

NOTE:  I am including this trade as a 100% loss, HOWEVER, SRS traded upto $111.22 on March 6th.  The low beteween these dates was $48.00.  IF we had placed a trailing stop order (to be explained in another post) we could have avoided this loss AND this trade would have been a WINNER of probably 75% OR BETTER.  I did not include these instructions in this trade, because I have not explained what a trailing stop is.  I would have had a trailing stop of 20% on the price of SRS (it would have been this large because of the volatility of SRS), which means that we would have exited this position when SRS was trading aroung $88.50-$89.00.

The Bear Put Spread is set up by buying a Higher strike Put while simultaneously selling a LOWER strike Put, both with the SAME expiration date.  The Bear Put Spread is a Debit Spread, meaning you will pay a higher price for the Put that you purchase than the price of the Put that you sell.

In order to enter this position the investor will have some beliefs.

          1)  She believes that the underlying security will stay the same or go down.  Depending on the strikes chosen, the underlying security can go up a little and this position will still make money.  That is why this position has the word Bear in the name, it has a bearish bias.

          2)  The investor understands that IF the underlying stock moves counter to the postion, in this case, up, the position can lose 100% of the money invested.  The good thing about a vertical spread, however, is that the options WILL retain some value, up until, expiration.  This means that a 100% loss can be avoided. 

Lets look at an example:

Lets assume that GE (General Electric) fits the criteria.  GE is trading for $10.78 on March 27, 2009.  I would buy an April 2009 $12 Put, for $1.55, while selling an April 2009 $11 Put, for $0.90 .  Here is the Risk/Reward graph for this position.

 

Bear Put Spread - GE

The Maximum Loss is $0.65 (+ Trading Costs), and this will occur if GE is above $12 at the expiration, April 18, 2009.

The Maximum Gain is $0.35 ($1 difference in strikes -$0.65 premium paid) (- Trading Costs), and this will occur if GE is below $11 at the expiration, April 18, 2009.

If GE is between $11 and $12 at expiration, April 18, 2009, then the gain/loss will be -$0.65 (the cost of the spread) – the price of GE + $12 (the price that you can sell (put) GE).  Therefore the breakeven point for this position is $11.35 (-$0.65 – $11.35 + $12 = $0) (not including trading costs).

This trade would be entered when GE was trading for $10.78.  This means that if GE stays the same or goes down OR goes up $0.22 (2.0%) this position will still make the maximum gain.  GE has to go up to $11.35, a gain of $0.57(or 5.3%), for this position to start to lose money. 

This position cost us $0.65/share and has an upside potential profit of $0.35/share.  That would be a 54% gain in less than 1 month.  Which is an approximate 650% APR (Annual Percentage Rate).

The Bull Put Spread is set up by buying a LOWER strike Put while simultaneously selling a HIGHER strike Put, both with the SAME expiration date.  This trade is also known as a Vertical Spread, because the expiration months are the SAME.  The Bull Put Spread is a Credit Spread, meaning you will receive a higher price for the Put that you sell than you wil pay for the Put that you purchase.

In order to enter this position the investor will have some beliefs.

          1)  She believes that the underlying security will stay the same or go up.  Depending on the strikes chosen, the underlying security can even go down a little and this position will still make money.  That is why this position has the word Bull in the name, it has a bullish bias.

          2)  The investor understands that IF the underlying stock moves counter to the postion, in this case, down, the position can lose 100% of the money at risk.  The good thing about a vertical spread, however, is that the options WILL retain some value, up until, expiration.  This means that a 100% loss can be avoided.

Lets look at an example:

In a recent Trading Idea I said to buy a July 2009 $12 Put while selling a July 2009 $13 Put on SLV  (IShares Silver ETF).  Here is the Risk/Reward graph for this position. 

Bull Put Spread - SLV (IShares Silver ETF)

The Maximum Loss is $0.60 ($1.00 difference in stikes – $.040 premium), and this will occur if SLV is trading below $12 at expiration, July 18, 2009.

The Maximum Gain is $0.40 (Premium recieved for position), and this will occur if SRS is trading above $13 at expiration, April 18, 2009.

The breakeven is if SLV is trading at $12.60 at expiration, July 18,2009.  The breakeven for this postition can be calculated by taking the strike price for the option sold (the $13 Put) – the premium received ($0.40).  If SLV is trading below $12.60, this position will have a loss.   If SLV is trading above $12.60 this position will have a gain.

Today SLV is trading for $13.68.  This means that SLV can lose 5% ($0.68)between now and July 18th and this position will still have the Maximum Gain.  SLV can lose 7.9% ($1.08) in that time frame and this position will Breakeven (not including trading costs).  SLV has to lose more than 12% in this time frame to incur the Maximum Loss.

Vertical Spread Example (Credit Spread): 

 

Sell SLVSM            July 2009    $13 Put             $1.20

Buy SLVSL            July 2009     $12 Put             $0.80

 

Net Premium               $0.40 (-Trading Costs)

 

Maximum Loss            $0.60 ($1 difference in strikes – $0.40 premium received) (+Trading Costs)

 

Maximum Gain            $0.40 (-Trading Costs)

 

SLV is trading for        $13.61 at the close on Friday 03/20/09